Well, FT at MDJ did a hack job on the economics of choosing a hybrid vs. a gasser, and was called to the mat for it in the comments section. He didn’t make any hugely egregious errors, like “factoring in” a “battery replacement”, or comparing a brand-new midsized hybrid to a used subcompact, but it was no better than what the clueless MSM put out month after month about payback periods, comparing a mid-size to a compact, assuming gas will never go up, ignoring government rebates (he did get the federal one, but not the provincial rebates, available in ON, QC, BC, MB, PE — or available to about 78% of Canada’s car-buying population, though FT is not himself one of that majority). I expected more from an otherwise intelligent personal finance blogger. Rather than learn from the comments though, he highlighted it in his June “best of” post, saying “The numbers don’t lie however, hybrids are simply economically more expensive.” Them’s fightin‘ words! Especially since the numbers (flawed as they were) did show that at least 2 hybrids were worth it, with payback periods of only 6.3 and 6.7 years — just about half the vehicle’s expected lifetime.
It’s only been a month, but things have already changed for that analysis. Gas is up to $1.38/L, the ecoauto federal rebate is just about gone, Toyota lowered the price of a few of its models, and in the States the Prius frenzy has gotten to the point where some people are selling their used cars for a profit. How’s that for resale value? So, I figure it’s probably worthwhile for me to walk through the numbers again and see just what the story is. Since some of you will start to glaze over with a post this long, I’ll summarize the salient points now. Depending on your assumptions:
- Prius, compared to a Camry, will save, at best, $44,593 over its lifetime; at worst, it will still save $1,697.
- The Civic hybrid, at best, saves $27,413; at worst, you save a mere $620.
- The numbers don’t lie: buying a hybrid makes good sense, with very limited downside, and a lot of potential savings if gas prices continue to increase as they have been and you keep your cars for a long time, with lots of city/stop-and-go driving. Read on for details!
1. Assumptions: When doing a cost-benefit or payback analysis like this looking years into the future, what you assume can have a big impact on the final outcome. If you assume gas is 80 cents/L and will stay there until the heat death of the universe, then the benefits of a fuel efficient car are plainly not going to be as great as if you started at $1.40/L and double that every 3 years. To try to get around my set of assumptions skewing the analysis, I’ll try to run the numbers for a couple of different assumptions so you can see the spread of possible outcomes. The best solution is for you to run your own numbers if you are thinking of buying a hybrid; use the mileage and driving style that best suit you; compare it to the car you would actually buy in its stead; try a few different projections of what gas prices might do. Towards the end I’ll provide a spreadsheet to help with this process. Here are the assumptions that you have to keep in mind that can really sway this type of analysis:
1a. Assumptions about gas price: What you assume gas prices will be in the future will be a very important factor in determining how fuel efficient your next car should be. So let’s make 4 different assumptions. First, that gas will stay at $1.38/L, indefinitely. Second, that we are in some kind of oil bubble, and that gas will actually go down, settling at $1/L. Third and fourth, that gas will continue to go up about 3 and 10% per year.
1b. Assumptions about driving: Do you ever get stuck in traffic? Ever? The EPA and NRC do not include stop-and-go traffic in their fuel consumption calculations. The “city” ratings you see for cars are based on a “city cycle” that involves some slow driving and some stops, but not the ~5 km/h stop-and-go crawl that I’m sure many of us have faced. This is one of many reasons why it’s very difficult to get the rated mileage on any car. If you’re a taxi driver or someone who does the majority of their driving in a hellish commute, you should take this into account. For now, I’m sticking with the NRC figures for ease of comparison, but you should know that hybrids and gassers are affected by the conditions differently (in stop-and-go, a hybrid tends to do proportionately better due to less idling, giving the advantage to the hybrid; in nasty cold-weather driving, the hurt is proportionately worse for the hybrid, because the heat requirements mean the engine doesn’t shut off at stops as much). So let’s assume first off someone who lives say out on PEI where almost all their driving can be considered to be at the “highway” rating. Our next scenario will be someone who is a very careful driver in both the city and highway and gets the “combined” rating — driving 50% in each condition. Finally, someone who mostly just commutes around the city, and uses solely the “city” rating. As a bonus, I’ll also include my best guess “real world” mileage based on my own experience communicating with hybrid drivers on greenhybrid.com compared to my 1997 Accord’s real world mileage of 8.5 L/100 km, with most of my driving on the 401.
1c. Assumptions about lifetime: How long do you keep your car for? At almost 240,000 km, my Accord looks like it’s nearing the end of its life, but might make it to 300,000 km yet. You can take as a given that a car purchased today should last 10 years or 200,000 km, which we’ll take as our bottom lifetime mileage, with 350,000 km as the upper assumption. With the lifetime, we’ll also show the savings over the vehicle life which is, IMHO, more useful than a time to payback, which masks the significance if the premium is big: for example, if you had a full hybrid with a $4k premium and a stop-start “GM hybrid” with a premium of $1k, and if they both had a payback period of 6 years or half their lifespan, you might be fooled into thinking they were both worthwhile hybrids — but the first one would save you an additional $4k in the second half of its life, and its greater fuel efficiency would be put to even better use in a rising gas cost environment. Do you care more about how much money you save total, or how soon you get what you put out back?
1d. Resale: Most people, of course, won’t buy a new car and then keep it until it stops running at the above assumption. So resale value will play some role in the decision of which car will be the most economical to run over time. Unfortunately this issue is somewhat uncertain. At the moment, hybrid cars are holding their resale value exceptionally well. However, if and when even more advanced cars (third generation hybrids or all-electrics) hit the streets, the hybrids might take a hit to their resale value. Of course, it’s probably a fair assumption that if that happens, the gassers will also take a hit. Rather than try to look at this, I’m going to ignore the issue and simply say that resale will be equivalent — you can pass on whatever hybrid premium you paid to the next buyer, who will also be willing to pay a little bit more up front to save some money at the pump.
1e. Comparables: A comparison of a hybrid car’s value requires, of course, something to compare it to. Unfortunately it can be somewhat difficult to pick which car is most comparable to a given hybrid, the Prius in particular, since it’s not a modified version of an existing model. I propose that the Accord or Camry is the best comparable to use — the Prius is a mid-sized car with the same cargo space and slightly more rear passenger leg room (but slightly less shoulder room and less comfortable/adjustable front seats). Some people propose the Corolla/Civic or Matrix as comparables, since the Prius is just a touch smaller than the Camry, so it should be bumped all the way down to a compact. People with an axe to grind or who are retarded say that the Prius is “for economy” and will compare it to a much smaller Yaris (or overseas, a VW Polo). Even after one picks the shell to compare to, it’s difficult to pick which trim level is comparable. For sure, an automatic transmission should be used for the comparison, unless you’re really one of the <10% of Canadians who pick a manual (and then if you use the manual fuel ratings, that you shift perfectly, always with an eye to economy). If you are doing this sort of analysis for yourself because this is a decision you are facing, be sure to use whatever car you are actually considering as an alternate.
1f. Maintenance: A factor to total cost of ownership is maintenance. Unfortunately there’s just not enough information to accurately compare hybrids and gassers. You can start by throwing that 5-year battery FUD out your nearest window. Near the end of its life: possibly (the warranty covers 160,000 km!). But then near the end of its life a gasser might need any one of a number of expensive repairs (including transmission), as well as more wear parts replaced in standard maintenance (brakes, belts, pumps, etc.). For now, we call it a wash and hope that the difference isn’t too great in either direction.
1g. Years vs km: Many of these comparisons look for “years to payback” and then assume some typical yearly mileage. Of course, if you then drive way more per year than the average person (for instance, as a taxi driver) then the comparison means little. Heavy drivers usually find hybrids a very appealing choice. I won’t even bother looking at it like that, and will stick with using distances and lifetime costs rather than time — you can figure out years if you want them from how much you drive per year (me, I drive about 20,000 km/year, or at least I did before I got my bike). One caveat to that is that I will be using time to figure the changes in the price of gas, and splitting the lifetime mileage over 12 years.
1h. Price - MSRP: One last assumption is that all these comparisons are done at the MSRP. It is very likely that you will negotiate down from MSRP if you are buying a new car, whether by negotiating on your own or with the help of something like the APA. It is possible that due to demand and other factors, you might be able to get more of a discount on a gasser (negotiate closer to invoice) than on a hybrid. However, from getting quotes from the APA I did not see much difference in 2006, so I’m ignoring this factor anyway. At most, it might sway the results by $1000 or so. Update, 2010: I have confirmed that it is possible to negotiate the price of a hybrid to within a few hundred dollars of invoice, exactly like a gasser. That’s always subject to change, especially with a gas price shock, but there you have it.
1i. Cost of Money: Ok, seriously, I know that you may have to finance the hybrid premium, and the interest paid may make that premium a little more painful, but come on. I’m ignoring this factor — you can do the math yourself if you find the numbers come out close enough that it might matter.
1j. Insurance Costs: I can’t say definitively what the difference in insurance costs will be for your hybrid vs regular car. Definitely shop around if you’re buying a hybrid. Some companies (in the US at least) offer discounts to hybrid drivers, both to project a green image for the insurance company, and also due to the belief that drivers who choose hybrids drive for efficiency: slower, leaving more following space. Contrarily, some insurance companies charge more to insure a hybrid due to the “unknown” factor as well as the fact that the resale values hold up so well that if there is an accident, it ends up costing them more to make the drivers whole. This factor is also ignored. Update, 2010: I have confirmed that TD Meloche Monnex at least charges the same for a Prius or Matrix, so there’s no insurance difference.
2a. Comparison - Prius: I’ve talked a lot about the Prius on here in the past. It’s the most famous, most recognizable hybrid, and the one I plan on buying myself… one day. So let’s start with its comparison!
The Prius is, at last count, the most fuel efficient car available to Canadians. That says a lot about hybrid technology considering the Prius is a comfortable, reasonably speedy mid-sized. Yes, it’s even more fuel efficient than the tiny 2-seater Smart ForTwo (though that’s a really close race). The Prius, as of just this week, starts at $27,600 and has a $2000 Ontario rebate on the PST (as well as $2k in BC, MB, and QC; PEI has a rebate as well, but I’m not 100% sure what that rebate is).
If you act quick, you might get the last of the federal EcoAuto rebate money, but I won’t include that in this analysis.
The Camry, Toyota’s other mid-sized car compares very favourably to the Prius. It starts at $23,400, putting the hybrid premium at $2,746. The Prius has a fraction of an inch more legroom, 25 L more cargo space, but 2.5 inches less shoulder room. You see immediately why it’s not really proper to compare it with a Corolla! The Camry gets 9.5 and 6.2 L/100 km in the city and highway, compared to the Prius at 4.0 and 4.2. So, assuming a 200 Mm lifetime, we find that under our constant ($1.38/L) gas price assumption, the Prius saves $7,604 in combined driving. Our worst-case assumptions, that gas goes back down to $1/L and only hwy driving is used, and the Prius still comes out saving $1,697 over its lifetime. In the best-case (for the Prius), where gas goes up by 10% per year and all driving is at the city rate, the savings are an astonishing $24,305! Use a 350,000 km lifetime for both cars and that best-case savings comes to $44,593 (enough to not only repay the cost of the hybrid premium, but enough gas savings to pay for the entire car outright!). Of course, that’s a lot of really shitty city driving under some downright oppressive gas prices (ending up at about $4/L in year 12 — though that might be coming for us). The savings from the real world mileage comparison, at constant gas prices, over a 350,000 km lifetime are $14,159. When compared to the Camry, there is no set of realistic assumptions that lead to buying the Prius being a bad financial decision, at least as long as we’re ignoring maintenance and cost of money.
So, as MDJ and some other uninformed journalists have done, let’s look at the Corolla as the comparison car. The Corolla is smaller than the Prius, with a bit less shoulder room up front, and a bit more in the back. It’s got less legroom in both, losing out on more than 2″ in the back (which makes a difference for putting adults in back), and the cargo area at 350 L is more than 100 L smaller than the Prius’ rating, and the Corolla doesn’t have the utility of the hatch (though for normal luggage, the longer, lower trunk is more usefully shaped). The lowest package with an automatic transmission, air conditioning, and cruise control is $18,295, putting the hybrid premium at $8,514.65 (though if you want keyless entry and 16″ wheels, you’re looking at $19,900). The Corolla gets 7.4 and 5.6 L/100 km in the city and highway cycles, resp. The best-case for the Corolla, gas prices go down to $1/L and the cars only last 200,000 km, and all driving is done on the highway, the Prius ends up costing $5,404 more over its life. Even at that lifespan, the Prius will save $869 if gas prices stay the same and all driving is in the city; $8,208 if all driving is in the city and gas goes up. With a 350,000 lifetime, the only way the Corolla makes more sense is if all driving is done on the highway. Here it really depends on which assumptions you have going in, but Wayfare has already vetoed the Corolla as not having enough space — the Prius or a Camry/Accord is really the only choice for us. It’s quite possible that a Corolla might be one’s comparison car of choice, in which case deciding what you think might happen to the cost of gas in the years to come and how long the cars will last will sway your results.
Let’s finish up our work with the Prius by looking at the Matrix. The Matrix is based on the Corolla platform (or so I’m told), so it has the same leg room issues. Surprisingly, the trunk in the Matrix hatchback is bigger than the Prius by 100 L — after having rented one I would have eyeballed it as about the same, so I think that size comes from height (the Prius hatch slopes down whereas the Matrix keeps a flatter roof further towards the back). The Matrix XR is $20,735 and gets 9.7 L/100 km in the city, 6.9 L/100 km on the highway — bizarrely, worse than the Camry. Knowing that, it’s pretty easy to see that the payback is pretty decent, even with the higher premium of $5,757. The Matrix would save a bit relative to the Prius if gas prices went down and the combined ($425) or highway only driving ($2647) was used with a 200,000 km lifetime. If gas prices go up, or lower-mileage conditions are considered, the Prius makes more financial sense. With a 350,000 km lifetime, the Matrix can still save a bit with highway only driving (down to $314) if gas goes down to $1/L, but if gas goes up 10% per year and the combined cycle is used, the Prius will save $14,900 over that time. At stable gas prices and the combined driving cycle, the Prius would save $866 over 200,000 km and $5,834 over 350,000 km lifetime.
2b. Comparison - Civic Hybrid: The Civic hybrid is really only compared to the Civic, for obvious reasons. The hybrid is a bit of an “upscale” trim, falling somewhere between the LX and EX in its feature list. To be conservative, we’ll pick the LX. The Hybird is $26,350 compared to the LX’s $22,180, which with the $2000 from the Ontario (or other provincial) government puts the hybrid premium at $2712. The gasser gets 8.2/5.7 L/100 km vs the hybrid at 4.7/4.2 L/100 km. At constant gas prices, a 250,000 km lifetime, and mixed cycle driving, you’d save $5,913 over the lifetime of the hybrid. There is no scenario where you save money with the gasser — though a short 200,000 km lifetime with all driving at the highway rating and gas prices that go down to $1/L would make it a close call, with the hybrid saving a mere $620. A 350,000 km lifetime in our city-driving Armageddon gas price universe (gas goes up 10%/year to almost $4/L in 12 years) and you could save as much as $27,413.
The Civic vs. Hybrid Civic is not an economic debate at all: the hybrid just makes so much financial sense, it has so little downside that if that were the issue, you just buy it and don’t worry. The real decision is between spending more (over its lifetime) for the gasser to get the bigger trunk, or save money (by spending a bit more up front) to get the hybrid, and then live with the small trunk — maybe having to get a roof rack for that twice a year trip to grandma’s. The day they make a hybrid Civic wagon, or find a way to hide those batteries without using up interior space, Honda could just shut down the rest of the Civic line.
2c. Comparison - Saturn Aura Hybrid: Here the MSRP discount thing is really not an issue, since Saturn has “no-haggle” pricing. The Aura “hybrid” is, well, kinda shitty. Many people actually wonder if GM put it out to make people mad on purpose, to question the fuel savings of a “hybrid”, to sully the name of hybrids everywhere so people would stop going to Toyota and Honda and come back to good old GM gassers. It gets 8.5/6.2 L/100 km compared to the gasser 4 cylinder’s 9.6/6.5 L/100 km (city/hwy). Most of the savings come from the stops in the driving cycle where the stop/start system can, well, turn the engine off to avoid idling. Its electric motor is not really powerful enough to provide any real electric boost, so regenerative braking also doesn’t really factor in. Nor does it feature a switch to an Atkinson-ish cycle. In all honesty, this start/stop system should be on all cars, and should have been years ago; it shouldn’t be referred to as a hybridization. However, the Aura is cheap: $27,575 for the hybrid to $24,240 for the XE. With the $2000 PST rebate (but no EcoAuto rebate, even if you get an ‘08), that puts the premium at a smooth $1,768. Under the very best scenario, 350,000 km lifetime and increasing gas prices at 10%, with all city driving, the Aura save $7,699 over its life (compare that to the tens of thousands saved by the Prius and Civic in this best-case for hybrids scenario). Drop the lifetime mileage to 200,000 km, and the savings are $3,642 for the 10% increasing gas prices and city driving; $163 for the combined cycle and stable gas prices. Of course, at worst, if gas prices go down and all your driving is on the highway over a 200,000 km lifetime, the Aura will only cost you $1102 more than the gas equivalent. Sure, it’s the “cheapest” hybrid, but it will save you the least over its lifetime because the efficiency gains aren’t really there.
3. The Notion of Payback: And finally, a quick note on the notion of payback. Here I’ve shown that, with a few sets of assumptions, that you will save money by buying a hybrid over a comparable gasser. Choosing a hybrid powertrain is the only option that will ever pay for itself. Reflect on that magical fact for a moment. Buying a moonroof, a V6, an automatic over a manual, or a larger car/SUV will never make economic sense. A hybrid does, in many scenarios, and also provides all those other wonderful environmental benefits and the coolness factor.
4. Conclusions: As you may have noticed, I have way, way too many potential parameters to even lay them all out in a chart. I’ll provide the excel sheet I created so you can run through any calculations you want to, now that you know what to take into consideration. It’s just taking too long to type this out. Nonetheless MDJ and the MSM journalists have been served. If you use a comparison that at all includes an increase in the price of gas or compare a car that stacks up well to the hybrid model such as the Prius vs Camry, and include the provincial rebates, then you find that in many potential outcomes, the hybrid makes economic sense. In some, such as an extended continuation of our current gas shock, you find that the hybrid becomes the only really intelligent option. So much upside, so little downside — and that’s not even taking into consideration the reduction in pollution. After all, at worst you’re out the “hybrid premium”, which is not that much more than the cost of a built-in navigation system. At best, you save tens of thousands of dollars if gas prices and the traffic on your commute go to hell.
There are some limits to this: if you can wait another 5-10 years, you may be able to get an all-electric or at least plug-in hybrid car, which will be very attractive for city commuting. If you buy used, your total cost will almost certainly be lower than getting a new hybrid (the exception being taxi drivers, who have such poor fuel economy with their city-only, heavy idling driving, and they pack on so many miles that at current gas prices a hybrid saves them money even if the alternative car is free). It almost always makes more sense to hang on to an already-paid for vehicle that’s running well than to trade in for a hybrid. The slam-dunk for hybrids vs comparable new cars does in part depend on the tax rebates. Also because the resale value on hybrids is so good, it’s difficult to make the same kind of financial sense vs a comparable used, non-hybrid car if you look at used-to-used.
4a. Diesel vs gasser: Over in the comments, some people also clamoured for a diesel vs gasser comparison, to see if the greater fuel economy of diesels made that purchase make financial sense, since diesels also have an up-front price premium. I’m not even going to touch that, because first of all, the diesels are not as efficient as people remember them being in the bold new low-sulphur diesel world, and secondly because the price of diesel keeps going up even faster than gas. But most of all, because diesels are dirty. With hybrids, one wants to check if it makes financial sense for selfish reasons, and if it does, then go for it because it has these great environmental benefits. For diesel, the opposite is the case: they emit more smog, asthma, and cancer-causing emissions, as well as carbon dioxide (for the same number of liters burned) so the fuel savings would have to be huge to justify that kind of social cost. And they’re not.
4b. Not A Panacea: Oil is getting more expensive. We’re running out of the easy-to-get-stuff. Global warming is an issue. Hybrids are not a panacea. Even if everyone drove a Prius, we’d only delay the inevitable by a few years, though we would handily take care of those air-quality-alert days. However, it’s the best available option short of giving up driving all together. It’s also a valuable stepping stone towards pure-electric or PHEV cars.